ACCT 480 CH 12 MC

The auditor performs substantive procedures related to property, plant, and equipment to determine if the assets have been pledged as collateral or title has transferred. What is the primary assertion the auditor is testing? a. Rights. b. Completeness. c. Existence. d. Valuation.

A

The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit procedure primarily tests which of the following assertions for the equipment account? a. Valuation. b. Rights. c. Presentation and disclosure. d. Existence.

A

Which of the following is false regarding the valuation of goodwill? a. Goodwill is tested for impairment quarterly. b. By definition, acquired parts of the business (or goodwill) must be sufficiently identifiable so that they can be managed as a unit or may be separately identified and sold as a unit. c. Goodwill is the excess of the purchase price over the fair market value of the acquired company's tangible assets, identifiable intangible assets, and liabilities. d. U.S. accounting standards require that goodwill be specifically identified with an operating segment or a reporting unit.

A

Which of the following is not a circumstance indicating potential impairment of intangible assets? a. The asset generates just as much cash flow as in the past. b. Losses or projections indicating continuing losses associated with an asset used to generate revenue. c. An accumulation of costs that are significantly in excess of the amount originally expected to be needed to acquire or construct the asset. d. A change in circumstances, such as the legal environment or business climate, that could affect the asset's value.

A

Which of the following is not a substantive audit procedure for leases? a. For all operating leases, determine that the client has recorded assets and lease obligations properly. b. Review the client's disclosure of lease obligations for compliance with GAAP. c. Obtain and read copies of lease agreements and develop a schedule of leases. d. Review relevant expense accounts and determine if there are entries related to leases.

A

Which of the following items is not used by natural resource companies to estimate the asset value of natural resources over the life of the resource, e.g., oil or coal? a. Restoration rate. b. Reserves. c. Reclamation expense. d. Depletion rate.

A

Which of the following procedures could the auditor perform to test the effectiveness of controls over asset impairment? a. Inquire of management as to its process for determining assessment impairment, and follow up as appropriate. b. Perform substantive analytical procedures. c. Send confirmations to the management specialist who performed work related to the impairment. d. Inspect the asset for potential impairment.

A

Which of the following procedures is not a procedure used by an auditor in searching for unrecorded disposals of long-lived assets? a. Send confirmations to insurance agents. b. Examine scrap sales accounts. c. Examine property tax records. d. Make client inquiries.

A

Which of the following risks is an inherent risk related to asset impairment? a. Determination of asset impairment requires management judgment. b. It is difficult to identify the costs associated with the discovery of natural resources. c. Management might have incentives to not record all asset disposals. d. All of the above are inherent risks related to asset impairment.

A

Which of the following statements is true? a. Existence and valuation assertions related to long-lived assets are usually the most relevant assertions. b. A concern regarding the existence of long-lived assets relates to whether management has properly recorded depreciation. c. Depletion expense is not an account that would be included when auditing long-lived assets. d. All of these statements are true.

A

As part of auditing equipment, the auditor will inspect new equipment additions selected from the client's property ledger. When performing this procedure, which assertion is the auditor focusing on? a. Valuation. b. Existence. c. Rights and obligations. d. Completeness.

B

If no control deficiencies are identified, how will the extent of substantive testing required differ from a setting where deficiencies in internal control were identified? a. The extent of testing will be more. b. The extent of testing will be less. c. The extent of testing will be the same in the two settings. d. The extent of testing is not affected by control deficiencies.

B

If the auditor is testing the reasonableness of depreciation expense for the year, which assertion is being tested? a. Completeness. b. Valuation. c. Existence. d. Rights and obligations.

B

In the audit approach for assessing fair value, which should the auditor determine for Level 2 assets? a. The performance of tests of controls. b. The correspondence of the client's assets to similar assets in an active market. c. Sensitivity of model used for marking to model. d. Contingent liabilities.

B

The tour of the manufacturing plant may best assist the auditor in determining which of the following? a. Whether all purchases are authorized. b. Whether any machinery is inoperative in the production cycle. c. Estimates of depreciation expense. d. Management's strategy for assessing impairment.

B

Which of the following controls should management have in place to provide reasonable assurance about asset impairment judgments? a. A policy requiring the reconciliation of the physical asset count with the property ledger. b. A systematic process to identify assets that are not currently in use. c. Limits to physical access of long-lived assets. d. A formal budgeting process.

B

Which of the following is a term used to describe management's recognition that a significant portion of long-lived assets is no longer as productive as originally expected? a. Asset depreciation. b. Asset impairment. c. Asset disposal. d. Asset amortization.

B

Which of the following is not an audit challenge relevant to fair value estimation of Level 1, 2, and 3 assets? a. Determining appropriate model and inputs expected cash flows. b. Assessing client methodology and cash flows to originally estimate value. c. Determining identical assets and active markets. d. Determining similar assets and relevant markets.

B

Which of the following statements is false regarding fraud risk related to long-lived assets? a. A potential fraud scheme involves not removing sold assets from the books. b. Because long-lived assets are typically an audit area of low risk, auditors do not need to perform brainstorming activities related to long-lived assets. c. Management might use unreasonably long depreciable lives in an effort to reduce current-period expenses. d. None of these statements is false.

B

Which one of the following does not constitute a probable relationship between accounts? a. Equipment and depreciation. b. Oil reserves and depreciation. c. Patent and amortization. d. Assets under capital leases and amortization.

B

Which statement is true about a company's choice of capitalization policy? a. All assets with a useful life of more than one year must be capitalized. b. The company's policy is usually determined relative to materiality. c. The company may elect to capitalize operating expenses which exceed the minimum threshold for asset capitalization. d. The company's policy must meet the minimum capitalization amounts established by GAAP.

B

Assume that the audit team notes the client has made a significant change in its product line which requires that new equipment be purchased. Which of the following would be of greatest concern to the auditor? a. Inappropriate book value of new equipment. b. Inappropriate depreciation calculation for new equipment. c. Impaired value of old equipment. d. Impaired value of new equipment.

C

Assume that the auditor decides to only perform substantive tests of details when auditing the equipment account. Which of the following statements best describes the account being audited? a. The client does not have effective controls over equipment. b. The equipment account involves only a few assets of relatively high value. c. Either the client does not have effective controls over equipment or the equipment account involves only a few assets of relatively high value could be descriptive of the account being audited. d. Neither the client does not have effective controls over equipment or the equipment account involves only a few assets of relatively high value could be descriptive of the account being audited.

C

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following relates to Level 3? a. Quoted prices for identical items in active, liquid, and visible markets. b. Observable information for similar items in active or inactive markets. c. Unobservable inputs to be used in situations where markets do not exist. d. Unobservable inputs to be used in illiquid situations.

C

When auditing intangible assets, the auditor would likely recompute amortization and determine whether management's recorded amount is reasonable. When performing this procedure, which assertion is the auditor focusing on? a. Completeness. b. Existence. c. Valuation. d. Rights and obligations.

C

Which is the primary assertion tested in conjunction with obtaining evidence regarding impairment? a. Cutoff. b. Rights. c. Valuation. d. Existence.

C

Which of the following approaches for determining fair value of Level 3 assets is used by the auditor? a. Performing an analysis of trades on similar assets. b. Reviewing contracts to determine if loss is other than temporary. c. Determining appropriate model and sensitivity of model. d. Performing an analysis of volume of trading activity.

C

Which of the following controls is not a typical control that affects multiple assertions for long-lived assets? a. Periodic comparison of physical assets to subsidiary records with the general ledger. b. Periodic reconciliations of subsidiary records with the general ledger. c. Reviewing insurance policies for adequate replacement coverage of assets. d. Formal budgeting process with appropriate follow-up variance analysis.

C

Which of the following controls would be most useful in providing reasonable assurance about the valuation of tangible long-lived assets? a. A formal budgeting process. b. A policy requiring the reconciliation of the physical asset count with the property ledger. c. A policy requiring that deprecation categories and lives be periodically assessed. d. Written policies requiring authorization for the acquisition of long-lived assets.

C

Which of the following evidence items would an auditor most likely not consider when evaluating the potential impairment of goodwill? a. The current market capitalization of the organization in comparison with its net book value. b. The cash flows and operating data of the reporting unit since acquisition compared with estimates made at the time of acquisition. c. The acquisition made by a competitor of an organization that is not a direct competitor of the client. d. The growth or decline in market share of the reporting unit since acquisition.

C

Which of the following expense accounts is associated with intangible assets with a definite life? a. Depletion expense. b. Depreciation expense. c. Amortization expense. d. None of the above.

C

Which of the following expense accounts is associated with natural resources? a. Depreciation expense. b. Amortization expense. c. Depletion expense. d. Capitalization expense.

C

Which of the following is not a significant challenge related to valuation issues for audits of merger and acquisition transactions? a. Measuring restructuring charges. b. Valuing the assets upon acquisition. c. Measuring the qualifications of personnel from the acquired company. d. Valuing the liabilities upon acquisition.

C

Which of the following long-lived assets presents the most difficulty in determining its cost? a. Equipment. b. Inventory. c. Patent. d. All the above are equally difficult in determining cost.

C

Which of the following procedures is not a fraud-related audit procedure used to respond to identified fraud risk factors? a. Use the work of a specialist for asset valuations, including impairments. b. Physically inspect tangible assets, including major additions, and agree serial numbers with invoices or other supporting documents. c. All of the above are fraud-related audit procedures. d. Confirm the terms of significant additions of property or intangibles with other parties involved in the transaction.

C

Which of the following should the client have as part of its process for estimating fair value? a. A systematic process to identify each asset that is subject to realizable value estimation. b. An analysis of transactions that have taken place within the client's organization. c. A realistic process to estimate future cash flows to discount back to a present value. d. A process to identify relevant historical values.

C

Which one of the following factors is not an inherent risk associated with long-lived assets? a. Impairment of assets. b. Incomplete recording of disposals. c. Lack of physical controls over the long-lived assets. d. Obsolescence of assets.

C

An auditor performing planning analytical procedures scans the repairs and maintenance expense accounts. Which of the following statements is likely consistent with the auditor's focus? a. Expenditures for long-lived assets have been properly approved. b. The auditor would not be performing scanning as a planning analytical procedure. c. Expenditures for long-lived assets have been recorded in the correct period. d. Expenditures for long-lived assets have not been charged to expense.

D

Audit procedures should be proportional to which of the following? a. Size of the firm. b. The assessed misstatements. c. Size of the client. d. The assessed risks.

D

For intangible assets, controls should be designed to do which of the following? a. Identify and account for intangible asset impairments. b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the asset. c. Provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. d. All of the above.

D

If the auditor is performing substantive procedure to determine whether the long-lived asset balance is reflected on the balance sheet in the noncurrent section, which of the following assertions is being tested? a. Existence. b. Rights and obligations. c. Completeness. d. Presentation and disclosure.

D

If the auditor is testing long-lived asset account balances to see if they include all relevant transactions that have taken place during the period, what is the primary assertion being tested? a. Existence. b. Valuation. c. Presentation and disclosure. d. Completeness.

D

In a tour of a client's manufacturing facility, the auditor is most likely attempting to satisfy which of the following management assertions related to long-lived assets? a. Presentation and disclosure. b. Completeness. c. Rights. d. Existence.

D

The FASB has set a hierarchy of inputs to consider in assessing fair value. Which of the following valuations are generally viewed as the most subjective? a. Level 2. b. Level 0. c. Level 1. d. Level 3.

D

When performing preliminary analytical procedures related to long-lived assets, which of the following should the auditor compare the unaudited financial statements with? a. Past results. b. Industry trends. c. Future company projections. d. Both A and B.

D

Which of the following actions is not a potential fraud scheme related to long-lived assets? a. Impairment losses on long-lived assets are not recognized. b. Costs that should have been expenses are improperly capitalized. c. Amortization of intangible assets is miscalculated. d. All the above are potential fraud schemes.

D

Which of the following analyses might an auditor perform as part of planning analytical procedures for long-lived assets? a. Develop an overall estimate of depreciation expense. b. Compare capital expenditures with the client's capital budget. c. Perform a trend analysis of the ratio of depreciation expense to total depreciable long-lived tangible assets. d. All of these could be performed as part of planning analytical procedures.

D

Which of the following assertions are usually the two most relevant assertions related to long-lived assets? a. Existence and presentation. b. Valuation and completeness. c. Completeness and existence. d. Existence and valuation.

D

Which of the following controls related to management's asset impairment judgments does the auditor need to understand? a. A systematic process to identify assets that are not currently in use. b. Projections of future cash flows that is based on management's strategic plans and economic conditions. c. Systematic development of current market values of similar assets prepared by the client. d. All of the above.

D

Which of the following factors is not an inherent risk related to asset impairment? a. Management is normally not interested in identifying and writing down assets. b. Sometimes management wants to write down every potentially impaired asset to a minimum realizable value. c. Determining asset impairment requires a good information system, a systematic process, effective controls, and professional judgment. d. All of the above are inherent risk factors.

D

Which of the following information should be included in management's documentation regarding intangible assets? a. Manner of acquisition. b. Basis for the capitalized amount c. Expected period of benefit. d. All the above should be included.

D

Which of the following is a long-lived asset? a. Tangible assets such as equipment. b. Intangible assets such as patents. c. Natural resources. d. All of these.

D

Which of the following is a true statement about accounting for leases under the FASB standard issued in 2016? a. Classification criteria under the new standard apply only to lessees and not to lessors. b. The standard does not require capitalization of any lease embedded in another contract. c. Fewer leases will be capitalized under the new standard. d. The new standard requires companies to move leased assets and related liabilities out of footnote disclosures and onto the balance sheet.

D

Which of the following is not a technique that auditors can use when performing planning analytical procedures related to long-lived assets? a. Perform an overall estimate of depreciation expense. b. Review and analyze gains/losses on disposals of equipment. c. Compare depreciable lives used by the client for various asset categories with those of the industry. d. All the above are techniques that auditors can use.

D

Which of the following is not a typical internal control over intangible assets? a. Procedures to provide reasonable assurance that decisions are appropriately made as to when to capitalize or expense research and development expenditures. b. Development of amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. Procedures to identify and account for intangible asset impairment. d. All of the above are typical controls for intangible assets.

D

Which of the following is not a typical internal control over long-lived assets? a. Reconcile physical asset inventory with the property ledger. b. Periodically review management strategy and systematically assess the impairment of assets. c. Identify obsolete or scrapped equipment and write it down to scrap value. d. Periodically reassess the appropriateness of depletion categories.

D

Which of the following is not an inherent risk related to long-lived asset accounts? a. Failing to record asset disposals. b. Capitalizing repairs and maintenance expense. c. Changing depreciation estimates to manage earnings. d. All of these are inherent risks related to long-lived asset accounts.

D

Which of the following models is associated with Level 3 in the FASB hierarchy for ascertaining fair value? a. Historical cost model. b. Replacement model. c. Mark to market model. d. Mark to model.

D

Which of the following procedures is a substantive procedure that relates to the rights and obligations assertion? a. Inquire of management about assets that are idle. b. Assess management's impairment estimates. c. Recalculate amortization expense. d. Examine documents of title.

D

Which of the following procedures is not a substantive procedure used for testing the valuation of long-lived assets? a. Assess management's impairment estimates. b. Inquire of management about assets that are idle. c. Develop an independent estimate of amortization expense. d. All of the above are procedures used for testing the valuation assertion.

D

Which of the following situations would lead an auditor to test controls over long-lived assets? a. Substantive analytical procedures suggested that controls over long-lived assets were not effective. b. Tests of details identified many errors in recording long-lived asset transactions. c. The auditor has decided that the additional effort to test controls would not exceed the potential reduction in substantive procedures. d. Risk assessment procedures indicated that controls were effectively designed.

D

Which of the following statements is true? a. Intangible assets should not be recorded. b. Intangible assets should be recorded at fair market value. c. Intangible assets should be recorded at future market value. d. Intangible assets should be recorded at cost.

D

Which of the following techniques can managers use to prevent the outright theft of long-lived assets? a. Assign accountability for long-lived assets to specific individuals. b. Conduct physical counts of existing and new long-lived assets purchased during the year. c. Capitalize transactions that they should expense. d. Two of these.

D

Which of the following valuation issues are associated with merger and acquisition activity? a. Valuing assets of the acquired organization at their FMV at the time of acquisition. b. Measuring restructuring charges associated with the acquisition. c. Valuing liabilities of the acquired organization at their FMV at the time of acquisition. d. All of these.

D

Which one of the following approaches does not represent how the auditor will become aware of risks associated with long-lived assets? a. Obtaining knowledge of the client business. b. Reviewing the business plan related to major acquisitions. c. Reviewing the minutes of board of directors' meetings. d. All represent how the auditor will become aware of risks associated with long-lived assets and related expenses.

D

Which one of the following is not a management assertion relevant to long-lived assets? a. Existence. b. Valuation. c. Completeness. d. Reporting.

D

Which one of the following is not an audit procedure used when testing restructuring charges? a. Review current and proposed financial accounting standards to determine if changes have occurred in accounting for restructuring. b. Mathematically test the estimates. c. Review and independently test the estimates by reviewing (a) contracts, (b) appraisals for property or estimates from investment bankers, and (c) severance contracts. d. Evaluate the qualifications of management.

D

Which statement is true? a. Management is always reluctant to write down asset values. b. The incomplete recording of asset disposals understates the asset balance. c. Intangible assets do not require effective controls because they have low inherent risk. d. Complex ownership structures may create challenges in the recording of assets.

D

Reconciling the physical asset inventory with the property ledger on a periodic basis is a control related to which management assertion? a. Existence. b. Valuation. c. Rights and obligations. d. Completeness.

A

An auditor's review of the repair expense to identify any capital expenditures is a test related to which management assertion? a. Completion. b. Existence. c. Rights and obligations. d. Valuation.

A

As natural resources are used up, the client has to recognize which of the following types of expense? a. Depletion expense. b. Amortization expense. c. Reclamation expense. d. Depreciation expense.

A

Assume that a client's controls over recording retirements of long-lived tangible assets are not well designed. Which of the following procedures would the auditor plan to perform as a way of responding to the heightened risk of material misstatement? a. Select long-lived tangible assets recorded in the property ledger and locate them for inspection. b. Inspect long-lived tangible assets located at the client location and trace those assets to the property ledger. c. Review the tangible long-lived asset property ledger to see if depreciation was recorded on each tangible long-lived asset. d. The auditor would perform all of the above procedures to respond to the heightened risk of material misstatement due to poor client controls over recording retirements.

A

In the FASB hierarchy of inputs to consider for assessing fair value, which is associated with Level 1? a. Quoted prices on identical items. b. Observable information on similar items. c. Relevant economic and industry factors. d. Nonexistence of active markets.

A

After a natural resource such as gas or coal is used up by the client, the client is responsible for restoring the land to its original condition. What is the cost of this restoration called? a. Amortization expense. b. Impairment expense. c. Depletion expense. d. Reclamation expense.

D

A client has implemented a policy requiring the establishment and enforcement of property management training for all personnel involved in the use, stewardship, and management of equipment. Which of the following is not a test that could be used in testing the control? a. Inquiry. b. Observation. c. Inspection of documentation. d. Review of financial statements.

D